Mortgage
How Does LendingTree Get Paid?
LendingTree is compensated by companies on this site and this compensation may impact how and where offers appear on this site (such as the order). LendingTree does not include all lenders, savings products, or loan options available in the marketplace.
How Does LendingTree Get Paid?
LendingTree is compensated by companies on this site and this compensation may impact how and where offers appear on this site (such as the order). LendingTree does not include all lenders, savings products, or loan options available in the marketplace.
Crissinda Ponder
Crissinda Ponder is the mortgage managing editor at LendingTree, which she joined in 2018. She has a decade of writing and editing experience covering mortgages, homebuying, insurance and other personal finance topics.
More from the author
Updated on:
August 29th, 2022
Content was accurate at the time of publication.
We are committed to providing accurate content that helps you make informed money decisions. Our partners have not commissioned or endorsed this content. Read our At LendingTree, we are committed to providing accurate and actionable content that helps you make informed decisions about your money. Our team of writers and editors follows these key guidelines:Editorial Guidelines
Uncle Sam could take a bite out of the profit you make when selling your home. The thing is, he likely won’t — most home sales fall under large exemptions. Here’s how the capital gains tax on a home sale works, and how you can keep the most dollars in your pocket.
On this page
- What is a capital gains tax on a home sale?
- How does the capital gains tax work?
- A capital gains tax example
- Can you avoid or reduce the capital gains tax on a home sale?
What is a capital gains tax on a home sale?
Similar to how states can charge a sales tax based on how much you pay in a transaction, a capital gains tax can charge you a percentage based on the profit you make (if any) when you sell your home. The tax rate is 0%, 15% or 20%, depending on your tax bracket.
Exemptions from the Taxpayer Relief Act of 1997, however, let most homeowners off the hook. If you lived in a property for at least two of the previous five years:
- You don’t have to pay capital gains taxes on the first $250,000 of profit if you file taxes as a single person.
- You don’t have to pay capital gains taxes on the first $500,000 of profit if you file taxes as a married person.
If you’re looking to purchase a new place once you sell your current one, here are the tax benefits of buying a home.
How does the capital gains tax work?
If you do have to pony up for the capital gains sales tax, here’s generally what you can expect to pay based on your taxable income:
- 0% if your taxable income is less than or equal to $40,400 as a single person; $80,800 if you’re married and filing jointly or you’re a qualifying widow(er).
- 15% if your taxable income falls between:
- $40,400 and $250,800 if you’re married filing separately.
- $40,400 and $445,850 as a single taxpayer.
- $80,800 and $501,600 if you’re married filing jointly or a widow(er).
- $54,100 and $473,750 for head of household.
- 20% if your taxable annual income exceeds the above limits.
When is a home sale fully taxable?
A home sale is fully taxable if you haven’t lived in the home for the required time — you have to have used the home as your primary residence for a full two out of the last five years.
There are exceptions to this that could be to your benefit. For example:
- If you or your spouse were on official, extended duty in the military, foreign service or intelligence community, you may be eligible to suspend the five-year test for up to 10 years.
- If you have become unable to care for yourself and now live in a care facility like a nursing home, you only need to have lived in your home for one out of the last five years.
A second home you sometimes lived in as your main home could still meet the primary residence requirement, but an established income property, a home you flipped or a business property may not.
A capital gains tax example
Imagine you make $300,000 in profit from selling your primary home that you’ve lived in for the last three years and you file taxes as a single, unmarried person. You qualify to exclude the first $250,000 of the profit, but you’ll have to pay taxes on the remaining $50,000. Your taxable income is $90,000 in the same year you sell your home, so your tax rate is 15%. You’ll pay an estimated $7,500 in capital gains tax.
Note: If you have any questions about your specific tax situation, it might be worth consulting a professional tax accountant.
Can you avoid or reduce the capital gains tax on a home sale?
You may be able to reduce your taxable income — and thus change your tax bracket — if some of the following applies to you:
- You made substantial home improvements.
- You operated a home business.
- You bought a house or paid home mortgage interest.
- You have deductible medical expenses.
- You purchased a car.
Maintain documents. Keep copies of your annual tax returns, plus any insurance reimbursem*nt files. If you made any repairs, improvements or renovations, keep paperwork showing what work was done and how much you paid.
Today's Mortgage Rates
- 6.77%
- 6.42%
- 7.38%
Calculate Payment
Advertising Disclosures Terms & Conditions apply. NMLS#1136
Mortgage Resources
Current Mortgage Rates
Mortgage Calculator
Best Mortgage Lenders
As an expert well-versed in personal finance and mortgage-related topics, it's evident that the article you've provided delves into the intricacies of the capital gains tax on home sales. The information is not only comprehensive but also demonstrates a nuanced understanding of the subject matter. Now, let's break down the concepts discussed in the article:
1. Introduction and Authorship:
-
Jenn Jones: A former senior writer at LendingTree, her background as an automotive finance manager and an editor for Standard & Poor’s Money Market Directory showcases a breadth of experience in finance.
-
Crissinda Ponder: The mortgage managing editor at LendingTree with a decade of writing and editing experience covering mortgages, homebuying, insurance, and other personal finance topics.
2. Publication Details:
-
Updated on August 29th, 2022: The article ensures currency by providing a specific date of the last update, instilling confidence in the accuracy of the information.
-
Editorial Guidelines: The commitment to accuracy and transparency is highlighted through the disclosure of editorial guidelines, assuring readers of the reliability of the content.
3. Understanding Capital Gains Tax on Home Sales:
-
Definition: The article explains that a capital gains tax on a home sale is akin to states charging sales tax based on transaction amounts.
-
Tax Rates: The tax rate is outlined as 0%, 15%, or 20%, contingent on the seller's tax bracket.
4. Exemptions:
- The Taxpayer Relief Act of 1997 provides exemptions for homeowners who lived in the property for at least two of the previous five years.
- Single filers get a $250,000 exemption.
- Married filers get a $500,000 exemption.
5. Tax Calculation:
- The article illustrates how the capital gains tax works based on taxable income, with different rates for various income brackets.
6. Taxable Home Sale Scenarios:
- Fully Taxable: A home sale is fully taxable if the seller hasn't lived in the home for the required time (two out of the last five years). Exceptions include military duty or residing in a care facility.
7. Example:
- An illustrative example calculates capital gains tax, considering a $300,000 profit on a home sale, providing practical insights into the tax implications.
8. Avoiding or Reducing Capital Gains Tax:
- Tips are provided for potentially reducing taxable income, such as making home improvements, operating a home business, or having deductible expenses.
9. Documentation:
- Emphasis on maintaining documents, including tax returns and records of repairs or improvements, is highlighted for potential tax benefits.
10. Mortgage Rates:
- The article concludes with current mortgage rates, offering additional information relevant to the audience.
In conclusion, the depth of knowledge and practical advice presented in this article positions it as a valuable resource for individuals navigating the complexities of capital gains tax on home sales.
